Replacing P&G boss may be Bill Ackman’s best hope

By Robert CyranThe author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Procter & Gamble is a hulking target for an uppity investor like Bill Ackman. Typical activist tactics like a breakup won’t work at the $178 billion Pampers-to-Crest giant. New leadership could be one thing to help get P&G back on track, though. Maybe Ackman could even recruit vaunted former Chief Executive A.G. Lafley to help.

It’s generally easier to get in and get heard at a smaller company. Ackman’s quarry, for example, has tended toward the scale of $4 billion J.C. Penney, where he owns a quarter of the company. Even with a $2 billion stake in P&G, Ackman would have a mere 1 percent of the U.S. consumer goods maker. Bigger companies also attract more regular scrutiny, often making their market valuations more efficient.

Of course, a squeaky wheel can effect change by bringing attention to even a big company’s underperformance. Ackman has a lot to work with at P&G. Since Bob McDonald replaced Lafley as CEO in 2009, the shares are up 16 percent. The S&P 500 index, however, has gained more than 40 percent over the same span, and rival Colgate’s stock is up almost 50 percent.

Shareholder aggression also requires a plan to win over other investors. Ackman did so at Fortune Brands by creating value with a carve-up. But the sum of P&G’s parts is worth between $175 billion and $208 billion, according to Sanford Bernstein. That’s not enough upside for such a wrenching upheaval. Reworking the balance sheet won’t help P&G either. And the company has a stellar record of returning capital to investors, having raised the dividend 54 years in a row.

That leaves management for Ackman to zero in on. Tighter cost controls are needed. P&G’s size and focus on big-brand products means margins should be significantly higher than peers. Uncharacteristic profit warnings and other slip-ups have come under McDonald’s watch, too. The sale of Pringles to Diamond Foods blew up partly for lack of properly vetting the buyer.

A change in the executive suite could be Ackman’s best hope. He poached Apple’s retail guru to try and turn around struggling J.C. Penney. Perhaps Ackman could enlist the retired Lafley, who doubled P&G’s market value during his nearly decade-long tenure, to return. James Kilts, the former head of Gillette, is another possibility. With P&G, though, if Ackman doesn’t go big, he’ll end up going home.